In the Developing World, Cash is the Best Hand-Out the Poor Can Get

What hand-out has the potential to make the greatest impact on improving the lives of the poor? A water filter or more adaptable seeds? Fertilizer or materials to build houses? None of these are better than the surprisingly straightforward solution: cash.

If the goal of development policy is to develop long-term human capital and empower the poor to make their own decisions, then cash is king. Cash transfers can inspire creative entrepreneurship in the short term, but can only result in lasting change if financed over longer periods of time and accompanied by economic growth that creates jobs.

Effectively, conditional cash transfer programs (CCTs) provide poor households, usually targeted at women, with a direct transfer of cash (provided that their children are in school and getting regular health check-ups). Most are publicized as long-term strategies for creating human capital by inducing healthier, more educated kids to grow into healthier adults better prepared for the world economy. Nevertheless, one of the greatest impacts in the short-term is felt by putting money in the hands of women, thereby empowering them to make purchasing decisions and increasing their share of household wealth.

In the indigenous region where I work in Panama, the transfer program has made an immediate impact on children by mitigating hunger and malnutrition, which are widespread problems in the area. While the CCT program is not enough to permit much superfluous spending, it is sufficient to encourage savings, and some communities have come up with unique ways to pool their money and create businesses.

In one case, a group of 25 women combined their savings to invest in a small dried goods store. Throughout the year, all the women buy their daily needs (rice, soap, salt, coffee) at the store and the accumulated profits are split among them. This cooperative model is an automatic savings solution. Their initial investment of $30 each is now paying them back at least as much each year. It may not seem like much, but it is enough to take a family member to the city to receive emergency health care, or to buy a new cooking pot at the end of the year.

In another community, women meet monthly and deposit $2.50 each into a savings account that has now accumulated to over $1,400. If they choose, they can invest in group projects, such as buying a cow to sell the meat, or farming corn. As individuals, the resources to fund such projects would be difficult to obtain, but as a group, they are pleased to pool the small amounts they have to realize a small but essential profit margin.

Both examples illustrate that women are willing and able to pool their resources to invest in businesses that create wealth. Despite these benefits, the profits individuals receive still do not amount to the total received from the transfer over a year, which means that the success of these small businesses is contingent upon the continued transfer of free cash. After all, take away the cash that the women spend at the store, and what will they use to buy goods?

When CCT programs were designed, the idea was to give families a short term solution to overcome hunger and eventually pull themselves out of poverty. The reality is that the families continually need the cash to meet basic needs, since many will remain poor in the immediate term, especially when the conditions of their poverty have not changed. Mexico tried a graduated program and saw families slip back into poverty when their term ran up after five years. My community still consists of rural farmers and there are virtually no conventional jobs to be had. Many years can pass in communities like mine without the introduction of new economic opportunities.

For instance, hardly any article about the rise of Brazil and its booming economy is written without mention of the government’s conditional cash transfer program, the Bolsa Familia. In an article about economic growth in traditionally poor northeastern Brazil, the Economist acknowledges the role of the “much-lauded anti-poverty scheme,” but concludes that “three-quarters of the growth in incomes … came from earnings, not handouts.” Without economic growth in poor regions to generate traditional jobs, transfers have limited reach.

In the meantime, women are setting excellent examples of their capacity to be creative and entrepreneurial if trusted with money to save and invest. Since rural regions are sparsely gaining from Panama’s fast-growing economy, the transfers are essential to enabling new businesses and consumer spending. The children of the women that I work with may be healthier and better positioned to take jobs in the modern economy, but without a commitment to promoting growth in rural areas, they will not have an opportunity to do so.